The Unassuming Economist

From a VoxEU post by Rabah Arezki:

“Algeria’s recent victory in the Africa Cup of Nations has united a country whose development model has frustrated its young and educated workforce. This column offers four lessons for economic development from the national football team’s success: on the role of competition and market forces, mobilising talent, the role of managers, and the importance of referees (i.e. regulation). 

On 19 July, Algeria won the 2019 edition of the Africa Cup of Nations. The victory was the culmination of a strongly contested international football tournament with 24 teams where we saw the best of competition, talent, and refereeing on the continent. Algeria’s consecration comes amid sweeping political transformation triggered by massive demonstrations in the past few months, in turn driven by youths asking for radical change. This has united Algerians and emboldened the national team. This can-do spirit and renewed momentum are likely to be key ingredients for delivering big reforms.

On the economic front, Algeria’s development model has frustrated an educated young and increasingly female labour force aspiring to economic empowerment beyond subsidies and public jobs. The model is essentially stuck in the transition from an administrated economy to a market economy. Moreover, decades of state domination with episodes of liberalisation have yielded crony capitalism, further distancing the population from appreciating the power of harnessing markets for development.

In Algeria, as in many countries, football has triggered passions capturing dreams of greatness and unifying nations. Football can offer four lessons for economic development in Algeria, which is looking to revamp its economic model (see also Kuper and Szymanski 2009 and Palacios-Huerta 2014).

The first lesson is on the role of competition and the power of market forces. In too many sectors in Algeria, prices are controlled and state or private monopolies are the rule, stifling the space for talented Algerians to transform their economy and deterring foreign investment. This is unsustainable considering the shrinking rents coming from oil and gas ever since oil prices collapsed in 2014. Football illustrates how market mechanisms are an important filter for detecting and rewarding talent based on performance and for moving away from favouritism. Without free entry and failure, as in football, economic dynamism and momentum rapidly come to a halt.”

Continue reading here.

A new IMF working paper, by authors Niels-Jakob Hansen, Joannes Mongardini and Fan Zhang, discusses the labor market slack and outgap through the Korean experience :

“Output gap estimates are widely used to inform macroeconomic policy decisions, including in Korea. The main determinant of these estimates is the measure of labor market slack. The traditional measure of unemployment in Korea yields an incomplete estimate of labor market slack, given that many workers prefer involuntary part-time jobs or leaving the labor force rather than registering as unemployed. This paper discusses a way in which the measure of unemployment can be broadened to yield a more accurate measure of labor market slack. This broader measure is then used to estimate the output gap using a multivariate filter, yielding a more meaningful measure of the output gap.”

A new paper by authors Werner Eichhorst, Arne L. Kalleberg, André Portela de Souza and Jelle Visse discusses on how to design sustainable labor market institutions:

“Demographic shifts, technological innovation, institutional reforms and global economic integration affect the way people work. Technological innovations have a major impact on occupations and industries, changing the ways economies in different world regions, in both developed and developing countries, work along with new division of labour that are facilitated by global economic integration. This paper is based on the joint work within the International Panel on Social Progress. It highlights three main areas of attention: a) skill formation, d) the challenges to collective bargaining, and e) social protection and labour market policies. Based on an assessment of the existing evidence, the paper suggests some policy principles and concrete policy options that might further those objectives, not ignoring some tensions that might exist between flexibility and security in the different labour markets. The ultimate direction of reforms in line with an idea of social progress lies in institutional arrangements that facilitate the reconciliation of flexibility and productivity with access to decent jobs and social protection. We argue that distinct policy options are available that can be implemented more globally in order to achieve these goals simultaneously”

In the context of Brexit and the developments within UK, this  interesting paper  by Monica Langella and Alan Manning gives a perspective on the labor market in the UK:

“One of the main forces that economists expect to equalize economic opportunity across areas is migration: individuals leaving depressed areas for booming areas. There is strong evidencethat migration does respond to differences in economic opportunity (for a thorough, though early, survey see Greenwood, 1997). The classic reference for the US is Blanchard and Katz (1992) who concluded that negative local labour demand shocks cause a short-run rise in the unemployment rate but that migration causes unemployment rates to be equalized within 5-7 years, a relatively short time. However, Amior and Manning (2018) argue that for the US the migration response over decades is slower than that estimated by Blanchard and Katz (1992) and that local demand shocks are highly persistent, causing very persistent differentials in unemployment rates. The US has also had a marked fall in residential mobility in recent years that has attracted attention (Molloy, Smith and Wozniak, 2011, 2014; Dao, Furceri, and Loungani, 2017). Similar exercises for Europe (e.g. Pissarides and McMaster, 1990; Decressin and Fatas, 1995; Overman , 2002; OECD 2005) find slower adjustment processes than in the US though Amior and Manning (2019) argue that the net migration response to unemployment in the UK is higher and more similar to the US than commonly believed. Although these studies do provide convincing evidence that migration does respond to economic opportunities, there is still surprisingly little evidence on the process in recent years (the survey of Greenwood, 1997, seems to be the most recent) and considerable gaps in our knowledge“

In a new paper, authors Eiji Goto and Constantin Burgi analyze the Okun’s law through sectoral and cross-country differences. The specific value add to existing research, according to the authors, is as follows:

“We contribute to the literature on cyclical differences by determining which category the Okun’s coefficient falls in. Specifically, we test whether the aggregate differences disappear if the sector sizes are the same across countries (e.g. if manufacturing has the same share of GDP for all countries) and we find that this can be rejected. We also examine whether all of the sectoral coefficients are proportional and we find that we cannot reject this. Next, we inspect whether any sector’s coefficient is the same as the aggregate’s and we find that this can also be rejected. Lastly, we decompose the Okun’s coefficient to determine whether the correlation between unemployment or the standard deviations of unemployment or GDP are driving the differences. We find that the standard deviation of unemployment is the main driver”